Prabhudas Lilladher's top 14 largecap stock picks for 2014

MUMBAI: The Indian market has had a volatile start in terms of performance in 2014 as international news flow dominated the direction for the better part of the month.

News flow, be it the tapering by the US Fed, pressure on EM currencies resulting in increased risk premium for EM equities, flight of capital to relatively safe havens like debt, etc, are likely to be the driving force in coming months.

According to Prabhudas Lilladher, with inflation at the forefront there will unlikely be any reduction in interest rates which will prolong economic recovery. With elections round the corner, investors will wait for the outcome of elections results for political stability.

"The Indian markets' direction has been on the international flows, should we see the risk premium continuing to remain high in EMs. The upside target of 6,500 looks capped, and this could increase pressure on the downside. As we come closer to the Lok Sabha polls, any indications of a fractured mandate is likely to result in an increase in negative sentiment, sending the market lower. The market may trade in a range between 5,700 to 6,400 levels in the near term," the report said.

Even as the year ahead looks challenging, the brokerage has identified largap ideas that can give sharp returns over a period of one year. Prabhudas Lilladher is 'overweight' on IT and healthcare, and is 'neutral' on consumer staples and 'underweight' on banks.

Following are the largecap ideas the brokerage is bullish on:

1) ITC (Target price Rs 381)

ITC reported adjusted PAT of Rs 2,390 crore in Q3FY14 as all businesses reported improved performance. Cigarette volumes declined by about 2 per cent (about 3.7 per cent in Q2) and EBIT expanded by 18.8 per cent. Non-cigarette EBIT increased by 18 per cent (4.9 per cent decline in Q2) as turnaround in FMCG and 19 per cent EBIT growth in agri-business were key drivers. We expect cigarette volumes and profit growth to further accelerate as higher prices and demand recovery has set in.

We expect full turnaround in FY15, backed by a strong performance in foods portfolio. ITC remains amongst the most resilient companies in the consumer pack with estimated PAT CAGR of 19 per cent over FY14-16. Another year of high double-digit excise increase remains a key risk. We value the stock at Rs 381 (SOTP-based on December 15 earnings). We maintain 'buy' on the stock.

2) Infosys (Target price Rs 4,550)

Revenue growth of 1.7 per cent (1.2 per cent) QoQ was just short of expectation. The strong beat to the margin is likely to sustain as the newer team continues to work on cost efficiencies.

The company is in process to automate the processes to bring down the 'TCO' of the clients. The new model with higher offshoring would help Infosys to regain their pole position in delivery excellence and offer competitive pricing with no impact on the operating margin. We expect Infosys to return to mid-teens revenue growth with mean reversion on margin in FY15. Hence, the valuation gap between Infosys and TCS will narrow. We revise our target price to Rs 4,550, 18x FY16e earnings estimate.

3) HDFC Bank (Target price Rs 760)

Challenging macros seem to be having some impact on HDFC Bank's financials but we see limited risks to overall profitability as we draw comfort from (1) Floating provisions (credit cost comfort) (2) Opex efficiency (offset growth pressure) and (3) Superior liability franchise. We continue to prefer HDFC Bank over other defensives (HDFC /Kotak) despite expensive valuations.

ROAs have inched to an all-time high of 2-plus per cent. While cost moderation is likely to sustain in the near term till growth picks up, credit costs levers look maxed out but floating provisions provide significant buffer.

With EPS growth similar to historic levels, low risk to earnings and sustained increase in ROAs, we believe historic valuations can sustain even in the current down cycle.

4) Wipro (Target price Rs 700)

Wipro reported Q3FY14 results in line with expectation. IT Services (USD) revenue grew by 2.9 per cent QoQ to $1,678 million.

According to the management, the deal pipeline has doubled with the "must-have accounts". Moreover, the participation in the large transformational deals has increased multi-fold. The management is keen on improving the win rate that will increase the revenue momentum.

We see improvement in the win rate to drive the business momentum, along with available margin levers to drive accelerated growth. We see Wipro in an early stage of re-rating cycle. We reiterate 'buy' rating, with a TP of Rs 700, 16x FY16E earnings estimate (20 per cent discount to TCS).

5) ICICI Bank (Target price Rs 1,150)

ICICI in Q3FY14 reported PPOP/PAT padded by large one-off treasury income (Rs 4.5 billion) and special dividend (Rs 1.1 billion) but even adjusted for these, core PPOP performance remains commendable.